Bank of England’s Breeden says inflation ‘hump’ is transitory
The Bank of England’s deputy governor has warned keeping interest rates too high could drag inflation below the Bank’s two per cent target in comments that further exposed the divergence that exists among central bank officials over the long-term path of inflation.
In a dovish speech delivered at Cardiff Business School, financial stability deputy chief Sarah Breeden argued that despite inflation risen to nearly four per cent over the last six months, the current “hump” was unlikely to extend into next year.
“I do not see evidence that the disinflation process is veering off-track. Instead it remains my central case that the ‘hump’ will prove just a bump in the road,” she said.
Breeden also cautioned colleagues on the MPC against being tempted to keep a more restrictive monetary policy stance until there is sustained evidence of price rises beginning to slow, saying: ““It may be tempting to wait to see the ‘whites of disinflation’s eyes’ before looking to reduce the restrictiveness of policy further.
“Holding policy too tight for too long comes with costs to output and employment, which could then pull inflation below target.”
The policymaker, who voted to hold Bank Rate at four per cent at last month’s MPC decision, sought to assuage fears that the speed of price rises would remain above target for long, attributing it instead to external and on-off hikes.
“The rise in UK food price inflation, which reached 5.1 per cent in August, reflects in large part a sharp increase in some agricultural commodity prices and so provides little signal on domestic inflationary pressures,” she said, before adding that energy and water bill rises have blurred the inflation picture.
She added that she saw “little reason not to believe” that wage growth would continue to fall down from highs that had kept Bank of England officials from adopting a rate-cutting cycle similar to many other developed economies.
Bank of England’s Mann sees ‘sticky’ scenario unfolding
The tenor of her speech jarred significantly with earlier comments made by external MPC member Catherine Mann, who, on the same day, said there was increasing evidence that officials’ sticky inflation scenario was coming to pass.
Mann, who voted to hold interest rates the last time the Bank cut rates in August, voiced fear that a recent spike in household inflation expectations, could trigger a round of secondary effects and wage demands.
She told a Financial Times event: “I believe that that inflation persistence scenario is playing out. Does that mean that I have no cuts on my horizon? No, because there is, of course, this other factor that we have to evaluate, which is the state of the real side of the economy, particularly the state of consumers.”
Inflation being at roughly double the Bank’s two per cent target has caused investors rapidly to pare back bets on any further rate cuts taking place this year.